Identifying the right number of properties during a 1031 exchange and getting that information to the right people, while also hitting your deadlines, will help to ensure you have a successful 1031 exchange process. In this article, we’ll go over what you need to know during each of these steps.
Maximum Number Of Properties You Can Identify
You are allowed to identify up to three properties. You can acquire one, two, or all three properties. What if you have more than three properties that you’d like to use in the exchange? This is possible through a couple of 1031 exchange rules called the 200% and 95% rules.
The 200% rule allows someone to identify more than three properties if the combined value of the properties does not exceed 200% of the relinquished property’s value. A good rule of thumb is to create some padding such as 190% or 180%, so that you don’t go over the 200% mark.
The 95% rule states that the exchanger may identify any number of properties with no reference to the sale price of the relinquished property, provided you actually acquire and close on 95% of the value identified. Use caution; if you acquire less than 95% then the entire exchange will be considered invalid.
Once a replacement property is found, that information must go into the agreement document, which is signed by the taxpayer. The property’s description must be clear and recognizable. Identifiable information includes the street address, legal description, or distinguishable name (for example, “The Broadmoor Building”).
Sending Identification To The Proper Party
Most people completing a 1031 exchange send their property notices to a qualified intermediary. That is a safe bet. Additionally, from IRS Form 8824 (like-kind exchanges), your notice can be sent to either of the following:
- To a person required to transfer the replacement property to you (including a disqualified person).
- To another person involved in the exchange (other than a disqualified person).
All parties involved must sign the document. A disqualified person is your real estate agent or someone related to you.
Important 1031 Deadlines
A 1031 exchange has some important deadlines that must be followed to avoid invalidating the exchange. The first is the 45-day identification period. After the sale of the relinquished property, you have 45 days to identify the replacement property.
The entire 1031 exchange must take place within 180 days — meaning, close to close. This includes the 45-day identification period. The replacement property must be closed by the 180th day.
Successfully executing a 1031 exchange is not difficult. Having someone experienced and skilled in the process is essential to a smooth transaction. The good news is, we can help. The team at Realized has built over one thousand 1031 plans and is ready to assist you in your 1031 transaction. Contact us today.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions.
Realized does not offer legal or tax advice. As such, this information should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. Before making any decision or taking any action, you should consult with a qualified professional.
1031 Exchange Guidebook
The 1031 Investor's Guidebook